Kenya, Uganda ready for new RVR deal

May 7, 2009

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By Capital News, NAIROBI, Kenya, May 7 – Kenya has stepped in with a raft of recommendations to salvage the current contract with the consortia of investors under the banner of Rift Valley Railways (RVR) ahead of Thursday’s D-day for the private managers to leave.

President Mwai Kibaki wants the Cabinet to ratify a re-negotiated concession agreement between Kenya and Uganda with RVR. Thursday marks the expiry of a termination notice issued in January by the two governments.

Among the highlights of the proposed agreement are changes to the shareholder and leadership structure of the Kenya-Uganda Railway concession.

“This is intended to fast-track the injection of new capital into the concession,” said a statement released by the Presidential Press Service (PPS).

Already, early this week, Uganda’s State Minister for Works John Byagambi announced that the Uganda government had already secured USh19 billion ($8.5 million) to cushion itself against any shocks that the termination may present.

Last week, the Committee of Uganda’s Parliament on Physical Infrastructure gave the Executive the green light to terminate the contract and promised to support the sector minister’s budget under which the package is allocated.

It will be the third time that the two governments have issued notices to the privateers. RVR -with a 25-year contract to run the two railways – is pushing for key amendments to the concession agreement that will enable it to take on board new shareholders with the money it needs to rescue the operation.

After Sheltam-the lead shareholder with a 35 percent stake was kicked out for non-performance – other investors including Helios Investment Partners have notice to acquire interest in RVR. Reports show that a number of private equity funds including Helios Investment Partners, have assessed the viability of the business with a view to buying into RVR.

Helios, a UK-based private equity firm, is among the four companies that have in the past two months expressed interest in investing in the railway operation. The list of potential investors includes Aureous Capital, Actis Group, and a Ugandan logistics company that has yet to be named. Though RVR urgently needs new money to revamp the operation, it has not been able to take new investors on board because the move requires approval by the two governments.

Though RVR urgently needs new money to revamp the operation, it has not been able to take new investors on board because the move requires approval by the two governments.

Under a restructuring plan approved by the Joint Railway Commission in August last year, the shareholders were to pump $50 million into RVR\’s operations.

Other details indicate that Uganda has agreed with the proposal by RVR that the shares of Sheltam be transferred to Kenya-Uganda Railway Holdings Ltd, in which Uganda would have shareholding and which would be the new lead investor.

Since last year, RVR has been under intense pressure to shape up or leave. The RVR board of directors has responded by approving a financial plan to inject $206 million (about Sh14 billion) into the operations in the next five years.

If termination either by RVR or the government is effected as it is currently being touted , prior concurrence must be received from the lenders as well as the Ugandan government.

"The lenders have step-in rights under the Direct Agreement in case of termination which takes precedence over those of the two governments. They also do not have powers to terminate on their own in the event that RVR fails to meet its contractual obligations under the Financing and Security documents entered between RVR and the lenders," says the concession document in part.

The lenders have a right to transfer the concession to another operator so long as such operator meets the conditions set out in the agreement. And if RVR defaults in their payment to the lenders for a period of nine months, the lenders may direct the concessionaire to terminate the agreement.

Delays in payment of concession fees as well as failure by lenders to disburse the committed loans have pushed the two governments to the decision.

While there is basis to end the contract as proposed, such a drastic move would not come without costs for both parties to the concession.

Were the contract to be ended, liquidated damages to be paid to RVR to the extent of two years\’ concession fees plus costs expenses that have been incurred by RVR range from outstanding concession fees and other payments, costs and expenses of re-tendering the concession and costs of returning the conceded assets to the standards stipulated in the contract.

Apart from default by RVR or the government, the contract can be cancelled due to a Political Risk Event, by mutual agreement or a natural disaster occurring.

According to the concession contract, the Government may default if there is expropriation of the track, train engines and wagons (or operating assets), changes to existing laws which invalidate Governments\’ obligations under the agreement, or if the government makes it unlawful for RVR to receive any payment, perform or enforce any material obligation.

The Government can also default if there is breach of exclusivity provisions on the concession. Way back in 2006, before taking over operations of the two rails, investors raised a total of $28 million-as a condition precedent before disbursement of the international loan.

In the contract, RVR was to grow freight traffic by at least 75 percent over the first five years, which would require a minimum investment of $6 million (about Sh3 billion a year).

Investment targets for RVR are set for review by June 2009.

The rail\’s rolling stock and the track are old and highly inefficient since the concessionaire has not been able to replace any during its last two years of operations.

Archaic equipment, demoralised workers and massive vandalism are the major problems that the company has to grapple with in trying to revitalize the firm.

If a review had been made possible, it would have given the new investors the benefit of doubt and allowed them to complete a rights issue and attract additional outside funding to re-capitalise the ailing line.

RVR\’s financing needs are also said to be too low compared to targets by infrastructure experts.

Estimates, for instance, by the private equity fund, Actis, show that it will cost about $500 million to fix problems and turn around the company.

According to experts, Kenya-Uganda Railway requires $500 million (about Sh28 billion) to match world class standards in the next five years.

Infrastructure experts say while there is a basis to end the contract as proposed, such a drastic move would not come without costs for both parties to the concession.

Were the contract to be ended, liquidated damages to be paid to RVR to the extent of two years\’ concession fees plus costs expenses that have been incurred by RVR range from outstanding concession fees and other payments, costs and expenses of re-tendering the concession and costs of returning the conceded assets to the standards stipulated in the contract.